Thursday, March 11, 2010

Russia's Crumbling Four "I's" Spell Dismal Future

In February of 2008, weeks before being elected to presidential office, President Medvedev of Russia called for the development of Russia's four "I's": Institutions, Infrastructure, Innovation, and Investments. After two years, how is Mr. Medvedev's Russia doing?

1. Institutions. According to the latest annual Global Competitiveness Report published by the World Economic Forum, Russia’s institutions have not only failed to improve, they have gotten worse. Of the 133 countries ranked, Russia dropped 12 slots to 63rd place. What’s more, the country’s rating based on the development of a fair and impartial judicial system — Medvedev’s pet project — dropped from 109th place to 116th. Protection of property rights — a key prerequisite for economic development — fell to an equally shameful 119th place. Moreover, Russia has turned into one of the world’s most-closed economies, ranked 109th of 121 in this category in the World Economic Forum report and falling behind even Mozambique, Kenya and Ethiopia.

According to the World Bank, conditions for doing business also worsened, with Russia dropping eight notches to 120th of 183 countries ranked. Only one country in the world had more onerous procedures for obtaining building permits — Eritrea, a dictatorship that is subjected to United Nations sanctions....

2. Infrastructure. In 2009, Russia suffered one of its worst disasters at Sayano-Shushenskaya, the country’s largest electrical power station. Moreover, it built only 1,000 kilometers of roads, as compared with the 47,000 kilometers of roads China built in 2007. Russia has allocated 18 percent less funding for the construction of roads in 2010 than it did last year, and it plans to build only 942 kilometers of roads this year. In contrast to Russia, most other countries are trying to stimulate their economies during the crisis by allocating more money for infrastructure projects. Over the next three years, for example, China will extend its railways by 31,000 kilometers, 13,000 kilometers of which will be built for bullet trains.

At the same time, the cost of building roads in Russia remains the highest in the world, and it continues to climb by 30 percent to 40 percent annually. Although hundreds of billions of dollars were allocated for infrastructure projects, as always, only a small portion of these funds has ultimately made it to its “destination point.”

3. Innovation. According to the State Statistics Service, 30 percent of Russian firms are developing innovative products or technologies. But this is a highly deceptive figure because all it takes to be considered “innovative” is for a factory to buy a new industrial machine, for example. This is clearly an attempt by the authorities to inflate the country’s “innovation quotient,” but few people are fooled by this. The real innovation quotient, which is much closer to 1 percent or 2 percent, is evident to any Russian consumer or businessperson.

The country’s scientific rating also continues to fall. Recent findings by Thomson Reuters show that Russia now publishes fewer scholarly papers and journals than India and China. Russia is even lagging behind in Medvedev’s favorite area: information technology. The World Economic Forum’s Global Information Technology Report put Russia in 70th place in 2007, and at 74th of 134 countries in 2009. That does not mean that IT is not developing in Russia — only that it is progressing far more rapidly elsewhere.

4. Investment. The global average decrease in direct foreign investment was 39 percent in 2009 as a result of the crisis, but in Russia it totaled 41 percent. With Russia’s low quality of government institutions, aging infrastructure and high cumulative foreign debt, Russia will not see an influx of foreign investment anytime soon.

To sum up Medvedev’s Four I’s, institutions are corrupt to the core, the infrastructure is falling apart, the country’s homegrown innovators are abandoning Russia in droves, and investment is evaporating. Perhaps it would be better to redefine his Four I’s to better reflect Russian reality: illusion, inefficiency, instability and incompetence._MoscowTimes

Russia is considered an "energy superpower" on the world stage, comparable to Saudi Arabia in that sense. But is Russia an energy superpower only by default?

How can Russia be an energy superpower if Gazprom extracted 25 percent less natural gas than the United States in 2009?

The answer is simple. Russia is an energy superpower by default. It lacks a real chemical industry.

The U.S. chemical industry is the largest in the world and consumes about 2 million terajoules of energy annually. Russia’s chemical industry is the 12th-largest and consumes 110,000 terajoules annually. Russia, with its massive territory, freezing temperatures and low energy efficiency consumes 280 bcm of natural gas on its domestic market. The United States — a country with both higher temperatures and energy efficiency — consumes 670 bcm of gas on its domestic market. Consolidated revenues of the U.S. chemical industry totaled $400 billion in 2008.

Ever since Putin gained control of Gazprom, he has been trying to gain control of Europe with the help of gas pipelines. Instead of pouring money and energy into gas pipelines that are carrying less gas every year and that were built with money that will never be recouped, why doesn’t Putin develop Russia’s chemical industry?

For Putin to develop the chemical sector requires a completely different business approach than producing gas. First, Dow Chemical and Dupont in the United States are privately held, and it will be hard to explain why Russian chemical plants must be state-owned. Second, the products of chemical plants are sold on the free market, whereas Putin’s approach is to crush markets — within Russia and abroad — using monopolies to drive up prices and generate “easy money.”

The Kremlin repeatedly assures itself that it is holding Europe hostage with the help of its gas pipelines. In fact, Russia is holding itself hostage by relying exclusively on its gas pipelines and mismanaging its energy and chemical industries on a colossal scale. _ MoscowTimes

Dictators are jealous of power. If it looks as if anyone in the country is achieving a higher status or level of power than the dictator, that person's fate is sealed. That is why Putin must place all lucrative industries under state control.

But unfortunately, state control means state mismanagement and incompetence. That is why the infrastructure of Russia's energy industry is crumbling -- and why dictators such as Putin must frequently invite overseas private industry into the country to develop new infrastructure. Of course, the inevitable nationalisation of the new infrastructure will certainly follow. But private corporations have until recently been able to get insurance to cover ventures inside Russia. Now, it is becoming much more difficult.

Russia has failed to confront its own dismal realities. Its dismal demographic situation. Its dismal morale crisis. Its poor state of health, as a people. Its overdependence upon a single industry -- energy. The hyper-centralisation of its energy assets into the greedy grasp of government officials. The incompetence of its military and military support infrastructure. And on and on... Russia is a third world country, run by dictators, but with first world pretensions. If Russia's people cannot see through the government smokescreen to the terminal crisis beyond -- and make some very hard decisions -- there is no hope for the country.

Russia could be a prosperous and vibrant society. But it would have to open up to the outside world, and open up and overhaul its internal social and governmental structures. Putin and the reigning clowns of Russia will never do that.